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Federal Reserve Bank of New York
Current Issues in Economics and Finance
Robust capital regulation
Viral V. Acharya
Hamid Mehran
Til Schuermann
Anjan V. Thakor
Abstract

Regulators and markets can find the balance sheets of large financial institutions difficult to penetrate, and they are mindful of how undercapitalization can create incentives to take on excessive risk. This study proposes a novel framework for capital regulation that addresses banks' incentives to take on excessive risk and leverage. The framework consists of a special capital account in addition to a core capital requirement. The special account would accrue to a bank's shareholders as long as the bank is solvent, but would pass to the bank's regulators—rather than its creditors—if the bank fails. By design, this special account thus limits risk taking, but ensures that creditors' disciplining incentives are preserved.


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Viral V. Acharya & Hamid Mehran & Til Schuermann & Anjan V. Thakor, "Robust capital regulation" , Federal Reserve Bank of New York, Current Issues in Economics and Finance, volume 18, issue May, 2012.
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Keywords: Assets (Accounting) ; Risk management ; Bank capital ; Bank supervision
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